What is Uniswap

What

is

Uniswap

What is Uniswap ? Order book-based trading is where buy and sell charges are presented in a list along with the total amount placed in each order. To make a successful trade using this system, a buy order has to be matched with a sell order on the opposite side of the order book for the same amount and price of an asset, and vice versa. The amount of open buy and sell orders for investment is known as “market depth.”

What is Uniswap?

Uniswap is an entirely different type of exchange that‘s fully decentralized – meaning it isn’t owned and operated by a single entity – and uses a relatively new kind of trading model called an automated liquidity protocol (see below).

The Uniswap platform was built in 2018 on top of the Ethereum blockchain, the world’s second-largest cryptocurrency project by market capitalization, making it compatible with all ERC-20 tokens and infrastructure such as wallet services like MetaMask and MyEtherWallet.

Uniswap is also completely open-source, which means anyone can copy the code to create their decentralized exchanges. It even allows users to list tokens on the business for free. Regular centralized exchanges are profit-driven and charge very high fees to list new coins, so this alone is a notable difference. 

Uniswap

Automated liquidity protocol

Uniswap solves the liquidity problem (described in the introduction) of centralized exchanges through an automated liquidity protocol. It works by incentivizing people trading on the business to become liquidity providers (LPs): Uniswap users pool their money together to create a fund used to execute all trades on the platform. Each token listed has its pool that users can contribute to, and the prices for each token are worked out using a math algorithm run by a computer (explained in “How token price is determined” below).

A buyer or seller does not have to wait for an opposite party to appear to complete a trade with this system. Instead, they can execute any work instantly at a known price provided there’s enough liquidity in the particular pool to facilitate it.

Each LP receives a token representing the pool’s staked contribution in exchange for putting up their funds. For example, if you contributed $10,000 to a liquidity pool that held $100,000 in total, you would receive a token for 10% of that pool. This token can be redeemed for a share of the trading fees. Uniswap charges users a flat 0.30% fee for every trade on the platform and automatically sends it to a liquidity reserve.

Whenever a liquidity provider decides to exit, they receive a portion of the total fees from the reserve relative to their staked amount in that pool. The token they received, which records what stake they’re owed, is then destroyed.

After the Uniswap v. two upgrades, a new protocol fee was introduced that can be turned on or off via a community vote and essentially sends 0.05% of every 0.30% trading fee to a Uniswap fund to finance future development. Currently, this fee option is turned off. However, if it is ever turned on, it means LPs will start receiving 0.25% of pool trading fees.

How token price is determined

Another essential element of this system is how it determines the price of each token. Instead of an order book system where the highest buyer and lowest seller choose the cost of each asset, Uniswap uses an automated market maker system. This alternative method for adjusting the price of an asset based on its supply and demand uses a long-standing mathematical equation. It works by increasing and decreasing the price of a coin depending on how many coins there are in the respective pool.

How to use Uniswap

Getting started with Uniswap is relatively straightforward. However, you will need to ensure you already have an ERC-20 supported wallet setup such as MetaMask, WalletConnect, Coinbase wallet, Portis, or Fortmatic.

Once you have one of those wallets, you need to add ether to it in order to trade on Uniswap and pay for gas – this is what Ethereum transaction fees are called. Gas payments vary in price depending on how many people are using the network. Most ERC-20 compatible wallet services give you three choices when making a payment over the Ethereum blockchain: slow, medium, or fast. Slow is the cheapest option, short is the most expensive, and medium is somewhere in between. It determines how Ethereum network miners quickly process our transactions.

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